Manufacturing (non-RMG): 2026-Q2 Sector Review

Macro-Financial Setting for the Manufacturing Sector

The manufacturing sector outside ready-made garments operates within a macroeconomic environment that remains under measurable stress. The national economy recorded GDP growth of 4.14 percent per annum according to World Bank WDI data for FY2023, a figure that sits below the Bangladesh Bureau of Statistics provisional estimate of 6.0 for FY23. This discrepancy in growth measurement introduces uncertainty for sectoral planning, particularly for non-RMG manufacturers who must calibrate production and investment against a shifting baseline of domestic demand.

Inflationary pressure continues to compress household purchasing power and elevate working capital costs for enterprises. CPI inflation averaged 10.47 percent on an annual average basis in 2024 per World Bank data. The Bangladesh Bureau of Statistics reported a figure of 9.7 percent for December 2024. Both readings indicate that input cost escalation remains a material operational concern for manufacturers across food processing, leather goods, light engineering, and consumer durables. Elevated inflation directly affects demand for non-essential manufactured goods and raises the cost of imported raw materials, which is particularly consequential for a sector that depends heavily on imported intermediates.

The external account presents a mixed picture for manufacturing firms that rely on imported inputs or serve export markets. Foreign exchange reserves stood at USD 31.07 billion in December 2024 under the IMF BPM6 method as reported by Bangladesh Bank. The exchange rate was 122.75 BDT per USD at the end of December 2024 on a mid-rate basis. For non-RMG manufacturers, the exchange rate level affects the landed cost of imported machinery, chemicals, and components. Total merchandise exports reached USD 44.5 billion in FY2023-24 on a Bangladesh Bank adjusted basis, while total merchandise imports stood at USD 63.7 billion for the same period on a goods, c.i.f. basis. The merchandise trade gap underscores the structural reliance of the manufacturing sector on imported inputs and capital goods.

Remittance inflows of USD 23.91 billion in FY2023-24, representing a 10.66 percent year-on-year increase, provide a stabilizing counterweight on the current account. These inflows support aggregate demand, including demand for domestically produced manufactured goods. However, remittances cannot substitute for the productive capacity and export diversification that the non-RMG manufacturing sector requires for sustained growth.

Fiscal Position and Public Debt Context

The fiscal space available for industrial policy interventions is materially shaped by the government's budgetary position. The fiscal deficit was equivalent to 4.7 percent of GDP according to the Ministry of Finance revised budget for FY2023-24. Public debt stood at 40.1 percent of GDP in 2024 per World Bank and IMF data. These parameters define the envelope within which the government can extend fiscal incentives, develop industrial infrastructure, or provide targeted support to distressed manufacturing sub-sectors.

For non-RMG manufacturing, the fiscal position implies that new policy initiatives must be designed around efficiency gains and private investment mobilization rather than broad-based public expenditure expansion. The scope for tax relief, subsidized credit, or direct capital injection into struggling sub-sectors is constrained by the prevailing deficit and debt levels.

Financial Sector Stress and Manufacturing Credit

The most severe structural risk to the non-RMG manufacturing sector originates in the financial system. The non-performing loan ratio reached 35.73 percent under Bangladesh Bank's Basel III reclassification in late 2025. This level of impaired assets in the banking system has direct consequences for manufacturing firms seeking working capital and term financing. When more than a third of the banking system's loan portfolio is classified as non-performing, the transmission mechanism for credit to the productive sector is severely disrupted.

For non-RMG manufacturers, the implications are multi-dimensional. First, banks facing high non-performing loan ratios tend to ration credit, requiring higher collateral coverage and imposing risk premiums on lending rates. Small and medium-sized manufacturers in sub-sectors such as light engineering, plastics, and agro-processing are disproportionately affected by credit tightening. Second, the cost of capital for viable manufacturing projects rises as banks seek to recover losses from impaired assets. Third, the willingness of financial institutions to extend fresh credit lines for capacity expansion or technology upgrades is diminished when balance sheets are stressed by legacy non-performing loans.

Factory Closures and Employment Losses

The non-RMG manufacturing sector has experienced a significant wave of permanent industrial closures over the past two years. Research findings indicate that 457 industrial units have permanently closed during this period. Of these, 287 units were in the non-RMG sector, while 170 were affiliated with various textile and garment associations. The concentration of closures in the non-RMG segment highlights the sector's particular vulnerability to the combination of macroeconomic stress, energy supply challenges, and financial sector dysfunction.

The geographic concentration of these closures is pronounced. Of the 457 closed units, 398 were located in the Gazipur, Ashulia, and Chattogram industrial belts. These three zones represent the core of Bangladesh's industrial base outside the specialized export processing zones. The loss of productive capacity in these belts carries implications for industrial clustering, supplier networks, and labor markets that extend beyond the individual factory closures.

Employment impacts continued into the current reporting period. In the first five months of 2026, 79 factories laid off 7,784 workers. These layoffs represent a continuing trajectory of labor shedding in the manufacturing sector. For policymakers, the cumulative effect of permanent closures and ongoing layoffs poses challenges for industrial employment stability, household income security in industrial regions, and the preservation of manufacturing skills in the workforce.

The closure data reveals a structural asymmetry between the RMG and non-RMG segments. While the RMG sector, supported by established export channels and preferential market access, has demonstrated greater resilience, the non-RMG sector has absorbed a disproportionate share of industrial exits. This asymmetry underscores the need for differentiated policy attention to sub-sectors that lack the scale, market access, or institutional support infrastructure that has developed around the garment industry.

Export Concentration and Product Diversification Deficits

The structural composition of non-RMG manufacturing exports reveals a fundamental challenge of scale and competitiveness. Out of 1,393 non-RMG export products, only 346 earn more than USD 1 million each. This means that the overwhelming majority of non-RMG export lines generate negligible foreign exchange earnings. The long tail of sub-scale product lines indicates that Bangladesh has not yet achieved the product-level competitiveness required for broad-based export diversification.

This pattern of export concentration within a highly diversified product portfolio suggests that the non-RMG sector suffers from systemic barriers to scaling. These barriers likely include insufficient investment in product development, limited access to international marketing channels, inadequate quality certification infrastructure, and an inability to meet the volume and consistency requirements of global buyers. The fact that only a fraction of product lines exceed the USD 1 million threshold also indicates that many non-RMG export shipments may be incidental or opportunistic rather than the result of sustained commercial relationships.

Research by the Research and Policy Integration for Development institute provides a quantified framework for targeted intervention. An estimated USD 140.43 million investment in seven targeted sectors could generate USD 216 million in economic benefits. This benefit-to-investment ratio suggests that concentrated public and private investment in select non-RMG sub-sectors can yield measurable returns. The policy challenge lies in identifying the seven sectors with the highest potential, designing investment vehicles that crowd in private capital, and ensuring that the investment translates into productive capacity rather than rent-seeking opportunities.

The handicraft sector illustrates both the potential and the structural limitations of non-RMG manufacturing. The sector exports to over 50 countries, demonstrating that Bangladeshi non-RMG products can penetrate diverse international markets. However, the handicraft segment typically operates at small scale with informal production structures, limited access to formal credit, and minimal investment in product design and quality standardization. The breadth of market reach achieved by the handicraft sector without substantial institutional support suggests that targeted investment in design, certification, and marketing infrastructure could unlock significantly higher export values.

Foreign Direct Investment Pipeline

The non-RMG manufacturing sector's medium-term prospects are partially shaped by the pipeline of foreign direct investment, particularly from Chinese firms. Chinese companies have submitted investment proposals worth a combined USD 9.21 billion to the Bangladesh government. This pipeline, if realized, would represent a substantial injection of capital, technology, and managerial expertise into the manufacturing sector.

Three specific proposals illustrate the character of this investment interest. Huaxin Textile Co. Ltd. has proposed USD 190 million for recycled cotton and yarn manufacturing facilities at the Payra Port Industrial Zone. This investment would introduce value-added processing in textile inputs and align with emerging global demand for sustainable manufacturing inputs. SF Express has proposed USD 180 million for cold-chain logistics and bonded warehouses at Mongla. This investment addresses a critical infrastructure gap for non-RMG manufacturers, particularly in agro-processing, pharmaceuticals, and temperature-sensitive consumer goods. China Civil Engineering Construction Corporation has proposed USD 650 million to develop the Mongla Port Economic Zone. Economic zone development is foundational for attracting further manufacturing investment, as it provides the physical and regulatory infrastructure required for industrial clustering.

The realization of this investment pipeline depends on several policy and institutional factors. The fiscal deficit of 4.7 percent of GDP and the public debt level of 40.1 percent of GDP constrain the government's ability to provide matching infrastructure investment or fiscal incentives. The non-performing loan ratio of 35.73 percent in the banking system may limit the capacity of domestic banks to co-finance projects with foreign investors. The exchange rate of 122.75 BDT per USD affects the local currency cost of land acquisition, labor, and construction for foreign investors. Reserve levels of USD 31.07 billion provide a buffer for external stability but must be managed against the merchandise trade gap, with imports of USD 63.7 billion substantially exceeding exports of USD 44.5 billion.

Policy Levers and Sectoral Strategy

The available policy levers for non-RMG manufacturing must be calibrated against the fiscal, financial, and external constraints documented in this review. The macroeconomic environment, characterized by inflation of 10.47 percent, a constrained fiscal position, and severe financial sector stress, limits the range of feasible interventions.

The first policy lever involves targeted sectoral investment. The RAPID framework indicates that USD 140.43 million invested across seven targeted sectors could yield USD 216 million in economic benefits. This suggests that a concentrated sectoral strategy, focused on sub-sectors with demonstrated potential, can generate returns exceeding the investment outlay. The selection of these seven sectors should be informed by export potential, employment intensity, domestic value addition, and backward and forward linkage effects within the manufacturing ecosystem.

The second policy lever involves accelerating the foreign investment pipeline. The USD 9.21 billion in Chinese investment proposals represents a transformative opportunity for non-RMG manufacturing capacity. Policy actions to convert proposals into realized investment include streamlining land allocation processes at designated economic zones, ensuring utility connections (particularly gas and electricity) for proposed facilities, and providing regulatory clarity on customs procedures, bonded warehouse operations, and profit repatriation. The SF Express proposal for cold-chain logistics at Mongla is particularly significant, as logistics infrastructure is a binding constraint for multiple non-RMG sub-sectors.

The third policy lever involves addressing the export scaling deficit. With only 346 of 1,393 non-RMG export products generating more than USD 1 million each, there is a clear need for interventions that help sub-scale product lines achieve commercial viability. This includes investment in quality testing and certification infrastructure, support for participation in international trade fairs and buyer-seller meetings, and the development of sector-specific export promotion programs. The handicraft sector's reach across over 50 countries demonstrates that market access is achievable, but scaling requires institutional support for design, quality, and consistency.

The fourth policy lever involves mitigating the financial sector's impact on manufacturing credit. While the non-performing loan ratio of 35.73 percent is a systemic issue that extends beyond the manufacturing sector, targeted interventions can partially insulate viable manufacturers from credit disruption. These interventions may include dedicated credit lines through development financial institutions, credit guarantee schemes for small and medium manufacturers, and regulatory accommodation for loan restructuring in sectors experiencing temporary distress rather than structural decline.

Synthesis of Risk Assessment

The non-RMG manufacturing sector faces a convergence of cyclical and structural risks. On the cyclical side, inflation at 10.47 percent and exchange rate pressure at 122.75 BDT per USD have elevated input costs and compressed margins. On the structural side, the closure of 287 non-RMG industrial units over the past two years, the layoff of 7,784 workers in the first five months of 2026, and the concentration of closures in the Gazipur, Ashulia, and Chattogram belts indicate a sector undergoing significant contraction.

The financial sector risk, represented by a 35.73 percent non-performing loan ratio, is the most acute threat to the sector's near-term viability. Without functional credit markets, even viable manufacturing firms cannot sustain operations, finance working capital, or invest in productivity improvements. The fiscal position, with a deficit of 4.7 percent of GDP and public debt at 40.1 percent of GDP, limits the scope for countercyclical public expenditure.

Against these risks, the USD 9.21 billion Chinese investment pipeline and the RAPID framework's USD 140.43 million targeted investment proposition represent concrete opportunities for sectoral renewal. The policy task for the coming quarter is to preserve existing manufacturing capacity where possible, facilitate the realization of committed foreign investment, and concentrate public resources on the sub-sectors and product lines with the highest demonstrated potential for scale, export earnings, and employment generation. The severity of the current contraction, as evidenced by factory closures and worker layoffs, requires that policy responses be both immediate and structurally oriented toward the long-term competitiveness of the non-RMG manufacturing base.